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The FTSE 100 fell due to the spillover of the UK gilt market’s liquidity crisis. The index came under pressure at 7100 on the 20-day moving average. A lack of follow-up support indicates that the bearish mood still prevails and the bulls are wary of a dead cat bounce. They will need to lift 7000 to retain some foothold. On the downside, 6800 is a critical bottom not only from the latest bounce but also last March’s lows. A breakout could trigger momentum selling to 6620 and signal a bearish market in the medium-term.

The US dollar steadied after the Fed minutes showed some consideration to the recession risk. The rally gained momentum after the greenback cleared the peak at 145.80. The rising trendline confirms that the uptrend has resumed. A lack of selling would carry the pair to its 24-year high at 147.50. As the RSI shot into the overbought zone, the dollar could use some breathing room. The psychological level of 146.00 on the trendline is the first support and 145.40 at the base of the breakout the bulls’ second line of defence.

The Australian dollar struggles over downbeat inflation expectations. The downtrend accelerated after the aussie cut through the demand area around 0.6400. An oversold RSI caused a rebound as intraday traders started to take profit. Still, the directional bias remains down and the bears could be waiting to double down at a better price. 0.6340 is the first hurdle and 0.6430 a congestion area from the previous brief consolidation. On the downside, a fall below 0.6200 would open the door to April 2020’s low at 0.6000.

Markets

Daily changes in European and US interest rate markets were modest compared to what we got used to of late. US yields eased between 1.5 bps (2-y) and 5.25 bps (5-y). Investors clearly didn’t want to place big directional bets ahead of today’s key US inflation report. A $32bn 10-y Treasury auction tailed substantially, suggesting only mediocre investor interest. Still the impact on markets remained modest. The Minutes of the September Fed policy meeting indicated that most Fed officials agreed that the cost of doing too little could turn out much higher further down the road. At the same time, some more dovish oriented members advocated to calibrate the pace of rate hikes as risks are mounting. An earlier rise in EMU/German yields with especially longer tenors setting new cycle peak levels also evaporated. German yields finally eased about 1 bp of maturities up to 10-y. The 30-y yield maintained a gain of 5.5 bps. On the UK bond market, there was a remarkable decline of short-term yields (2-y -27,4 bps). Yields at longer maturities were little changed as the Bank of England bought the biggest amount of LT bonds (including inflation linked bonds, total amount £4.56 bn). Even so, the tensions/conflicts of interest between the BoE and the government persists. The BoE’s Bailey apparently wants the temporary buying scheme to end this week. At the same time, UK Fin Min Kwarteng warned the BoE will be responsible for market volatility after the end of the program. Despite this stalemate/collision course between the BoE and the government, sterling yesterday rebounded. EUR/GBP dropped from the 0.885 area to close near 0.874. On the broader FX market, the dollar maintained recent gains against most majors (close DXY 113.3, EUR/USD 0.9705). USD/JPY was the exception to the rule. Only a whisker away from the 147 big figure, the pair again nears the 1998 peak, with markets looking for new MOF interventions to block further yen losses.

US CPI inflation evidently takes center stage today. For the headline figure, a modest easing from 8.3% to 8.1% Y/Y is expected. However, the dynamics of core inflation is expected to stay elevated at 0.4% M/M and 6.5% Y/Y (from 6.3%) with rent probably a key driver. Last month, an upward surprise only confirmed the Fed’s case to bring monetary policy clearly in restrictive territory, reinforcing a the established up-leg in yields. However, given recent hawkish Fed communication, this message should already to a large extent be discounted by markets. An upward surprise for sure will cause additional volatility. However, we are especially keen to see the market reaction in case of an in-line/softer than expected figure. Is there any room for consolidation after the recent rally in core yields and the dollar? This is especially the case as US (e.g 2-y & 10-y) yields are testing key technical resistance levels.

News Headlines

The ECB is eyeing a decision at its next policy meeting on changing the rules on TLTRO’s. The central bank wants to by-pass that cheap loans it has granted during previous crisis years to kickstart the economy get rerouted to its own deposit facility which all of a sudden looks very attractive following back-to-back large rate hikes (with more to come). Sources suggest that three possible options remain. The first and most simple one is unilaterally changing the terms of the TLTRO’s so that cash from the operations parked at the ECB would not be remunerated at the deposit rate. A second possibility consists out of treating TLTRO cash in the same way as minimum reserves, which are currently remunerated at 0.5%, below the 0.75% deposit rate. The final solution is some sort of reverse tiering that would allow for a more favourable remuneration up to a certain threshold, after which a lower rate would apply.

Russian President Putin suggested to transfer to the Black Sea the lost Nord Stream volumes that used to be transited across the Baltic Sea. The comments came ahead of a meeting with Turkish President Erdogan with Russia considering building more subsea natural gas pipelines to Turkey. An extra gas hub could be used to supply Europe, Putin suggested. He also hinted at using the Nord Stream 2 pipeline which is blocked from entering service by Germany.

Daily Pivots: (S1) 158.96; (P) 160.82; (R1) 161.90; More...

Intraday bias in GBP/JPY stays neutral at this point. On the downside, below 159.41 minor support will turn bias back to the downside for 148.93 again. However, firm break of 169.10 will confirm resumption of larger up trend. Also, while further rise could be seen, strong resistance might be seen from 169.10 high to limit upside, at least on first attempt.

In the bigger picture, strong support from 38.2% retracement of 123.94 to 169.10 at 151.84 suggests that price actions from 169.10 are developing into a corrective pattern only. That is, rise from 123.94 (2020 low) should resume at a later stage. This will now remain the favored case as long as 148.93 support holds.

Daily Pivots: (S1) 141.78; (P) 142.21; (R1) 142.98; More....

Intraday bias in EUR/JPY stays neutral at this point. On the downside, break of 140.77 minor support will turn bias back to the downside, to extend the corrective pattern from 145.62 with another falling leg towards 137.32 support. On the upside, above 144.06 will bring retest of 145.62 high.

In the bigger picture, as long as 133.38 support holds, the up trend from 114.42 (2020 low) could still extend through 145.62 high. In that case, next target is 149.76 (2015 high). However, sustained break of 133.38 will be a sign of medium term bearish reversal and bring deeper fall to 124.37 support first.

Daily Pivots: (S1) 0.8693; (P) 0.8780; (R1) 0.8831; More...

Intraday bias in EUR/GBP is turned neutral again as it retreated after edging higher to 0.8869. On the downside, break of 0.8723 minor support will turn bias back to the downside for resuming the fall from 0.9267 through 0.8647. next target is 0.8338 support. ON the upside, above 0.8869 will resume the rebound from 0.8647 towards 0.9267 resistance.

In the bigger picture, as long as 0.8720 resistance turned support holds, rise from 0.8201 is seen as resuming larger up trend from 0.6935 (2015 low). Break of 0.9499 (2020 high) should be seen at a later stage. However, firm break of 0.8720 will argue that sideway pattern from 0.9499 is extending with another falling leg instead.

Daily Pivots: (S1) 1.5415; (P) 1.5477; (R1) 1.5526; More...

Intraday bias in EUR/AUD is turned neutral with current retreat. Some consolidations could be seen but outlook will remain bullish as long as 1.5165 support holds. Above 1.5536 will target 161.8% projection of 1.4281 to 1.4965 from 1.4716 at 1.5823.

In the bigger picture, a medium term bottom should be in place at 1.4281, on bullish convergence condition in daily MACD. Further rise would be seen back to 1.6434 key resistance next. Break of 1.4965 resistance turned support is needed to indicate reversal. Otherwise, further rally will remain in favor.

Daily Pivots: (S1) 0.9653; (P) 0.9672; (R1) 0.9700; More....

Intraday bias in EUR/CHF stays neutral for the moment. On the upside, above 0.9798 will resume the rebound to 0.9864 resistance. Firm break there will solidify the case of medium term bottoming at 0.9407, and target 38.2% retracement of 1.1149 to 0.9407 at 1.0072. On the downside, below 0.9641 minor support will turn bias back to the downside for retesting 0.9407 low instead.

In the bigger picture, as long as 0.9864 resistance holds, long term down trend from 1.2004 (2008 high) is expected to continue. Next target is 138.2% projection of 1.2004 to 1.0505 to 1.1149 at 0.9033. However, firm break of 0.9864 will confirm medium term bottoming, on bullish convergence condition in daily MACD. Stronger rally would then be seen back to 55 week EMA (now at 1.0152), even as a corrective rebound.

Daily Pivots: (S1) 0.9669; (P) 0.9702; (R1) 0.9735; More...

EUR/USD continues to lose downside momentum, but further fall is in favor with 0.9816 resistance intact. Deeper decline would be seen to retest 0.9534 low. Firm break there will resume larger down trend for 100% projection of 1.0368 to 0.9534 from 0.9998 at 0.9163. On the upside, above 0.9816 will turn bias back to the upside for 0.9998 resistance instead.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, break of 0.9998 resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will stay bearish even with strong rebound.